ACCA Applied Knowledge · Business and Technology · Microeconomic factors
A firm sells a product with price elasticity of demand of 0.4. If the firm increases its selling price, what is the most likely effect on its total revenue?
Total revenue will rise. With elasticity of 0.4 demand is inelastic, so a price increase reduces quantity demanded by a proportionately smaller amount than the price rise, meaning the higher price per unit outweighs the lost sales.
- ATotal revenue will fall because quantity falls proportionately more
- BTotal revenue will rise because quantity falls proportionately lessCorrect
- CTotal revenue will remain unchanged
- DTotal revenue will fall because demand is elastic
Explanation
An elasticity of 0.4 is below 1, so demand is inelastic. A price rise causes a smaller proportionate fall in quantity, so revenue increases. The distractor claiming revenue falls confuses inelastic with elastic demand.
Did you get it right without looking?
One question tells you little. A timed set on Microeconomic factors shows your real accuracy, how long you take and where you lose marks.
More Microeconomic factors questions
- The cross elasticity of demand between product X and product Y is measured as -1.8. What does this indicate about the relationship between X…
- A small independent bakery chooses to remain small and serve a niche market of customers wanting hand-made products. Which factor best expla…
- Which of the following would cause a movement along a product's demand curve, rather than a shift of the curve?
- A farmer notices that a poor harvest has reduced the quantity of wheat available, while consumer demand is unchanged. Which statement best d…
- A fall in the price of a good leads to consumers buying more of it, with nothing else changing. How is this best described in demand and sup…
- A government introduces a per-unit tax on producers of a good. Which describes the effect on the market diagram, other things equal?